Hedge Funds Abandon Bearish Two-Year Treasury Wagers Before Fed

  • Speculators almost flat on futures, latest CFTC data show
  • Shift signals traders pared positions after jobs report

Futures speculators retreated from the most bearish stance on two-year Treasuries since 2007 in the lead-up to this week’s Federal Reserve meeting.

Hedge funds and other traders shrank their net short futures position on two-year Treasuries, the coupon maturity most sensitive to Fed policy changes, to 21,901 contracts as of June 14, from 206,727 a week earlier, according to Commodity Futures Trading Commission data released Friday. The latest figure represents the smallest bet since October that yields on the maturity would rise.

The swing in positioning, which followed the weaker-than-forecast labor report for May, proved prescient as Fed officials on June 15 released projections indicating they expect to lift interest rates at a slower pace.

“After the May payroll number, the expectations for a June Fed hike went down dramatically,” said Stanley Sun, a strategist in New York at Nomura Holdings Inc., one of the 23 primary dealers that trade with the Fed. Funds “had piled into longs as a positioning play ahead of the Fed. And it turned out in hindsight to be the right move.”

The number of officials who see just one rate increase in 2016 rose to six, from one in March, according to quarterly projections unveiled Wednesday. Policy makers in their statement painted a mixed picture of a U.S. economy where growth is picking up even as job gains slow. The median projection for the Fed’s target for the end of 2017 slid to 1.625 percent, from 1.875 percent in March, while the forecast for 2018 declined to 2.375 percent, from 3 percent.

The market-implied probability of a rate increase this year has dropped below 40 percent, from a 76 percent chance assigned at the start of the month.

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